Wholesalers in Mumbai continued to keep their establishments closed to protest against the local body tax (LBT) even as groups that represent retailers called off a nearly three-week-long strike on Saturday.

“Despite a section of retailers calling off the strike, wholesalers’ strike against LBT will continue,” Federation of Associations of Maharashtra president Mohan Gurnani said in a statement.

The Federation of Retail Traders Welfare Association, led by Viren Shah, had called off the strike on Saturday.The strike has resulted in a loss of about Rs.1 trillion, Gurnani said.

Traders in Maharashtra shut stores to protest against the state’s decision to impose LBT by replacing octroi.The protest is reminiscent of the prolonged strike in 1988, which ironically was for the abolition of octroi.People in Mumbai found it difficult to buy groceries and essentials such as milk, vegetables, bread and foodgrain as most shopkeepers downed shutters either in solidarity or fearing a backlash from fellow traders. As a result of this, footfalls have been rising in organized retail chains in Mumbai, Thane, Nagpur and Pune.In 2009, the state legislature passed a Bill which authorized the state government to abolish octroi and introduce LBT in phases since April 2010.

Unlike octroi, which has to be paid at the entry point of the city after physical examination of goods by municipal authorities, LBT is an account-based tax, which traders have to pay only once a month, depending upon their turnover.

After value added tax (VAT) was introduced, octroi was to be completely abolished but a major chunk of the municipal corporation’s revenue comes from octroi. Out of a budget of around Rs.26,700 crore of the Municipal Corporation of Greater Mumbai (MCGB) for fiscal 2014, more than Rs.7,500 crore is expected to come from octroi and LBT. Hence, the need to replace octroi with some other tax that can guarantee MCGB a steady source of income.

Out of the 26 municipal corporations in the state, LBT was being introduced between April 2010 and July 2012 in 14, while the court granted a stay on LBT in six municipal corporations. LBT was to be introduced in major cities such as Pune, Nagpur, Nasik, Navi Mumbai, Thane and Pimpri-Chinchwad from 1 April, and in Mumbai from 1 October.

The Supreme Court on Friday rejected a petition filed by traders from Pune against the imposition of LBT and, instead, directed the Bombay high court to hear the traders’ petition once again. The Bombay high court in March rejected a petition by the Pune Merchants Chamber.

Traders argue LBT will bring back the “inspector raj” as the LBT Act gives sweeping powers to municipal authorities to cease, check and raid premises, documents and goods of traders. Traders also claim LBT will increase their compliance cost. Under octroi, only those traders who imported goods in the city limit had to pay tax and maintain records.

Under LBT, all traders with a turnover of more than Rs.3 lakh have to pay tax and maintain records for seven years, failing which they face severe penal action, according to the traders.

On Saturday, the Maharashtra government issued advertisements in all leading Marathi, English and Gujarati dailies, explaining why it supported LBT, and sought to allay the fears of traders.

It should have done this earlier, say political observers.

“In the wholesale markets of Mumbai such as Mangaldas market, Crawford market, Manish market among others, our workers earn Rs.1,000-Rs.1,500 daily, depending on the work one gets; but this income has completely dried up for the last 10-15 days and many workers are thinking of returning to their villages till normalcy returns,” said Shashikant Shinde, Nationalist Congress Party legislator and president of Maharashtra State Mathadi and General Kamgar Union.

Trader lobby bodies are also suggesting a 1% or more surcharge on VAT, as has been introduced in Gujarat. The government can pay municipal corporations from this extra VAT collection as it doesn’t increase their compliance level, they suggest.

However, the government and the ruling party disagree. State Congress spokesman Sachin Sawant said, “A proposal to increase VAT is unfair to people living outside municipal corporations’ limit as VAT is the tax for the entire state and not only for people living within big cities.”

LBT was smoothly implemented in Kalyan-Dombivali municipal corporation on the outskirts of Mumbai and Aurangabad municipal corporations in 2011 and 2012, respectively.

The commissioners of both these municipal corporations were proactive and held a series of meetings with traders before introducing LBT in their respective corporations.Had the state done something similar earlier, the backlash could have been avoided.

Ajit Ranade, chief economist of the Aditya Birla group, argued against imposing surcharge on VAT and said, “It will seriously erode the autonomy of municipal bodies as they will depend on grants from state government and governments will use these as a weapon against opposition-controlled municipal corporations by delaying the release of grant, or all together denying it under some pretext.”

“LBT should be an interim measure,” he said, adding both state and municipal bodies “should carry out reforms in property tax system and scrapping of LBT”. The world over, property tax is a major source of income for municipal bodies, Ranade said.

On Friday evening, the state announced the formation of a panel under the chairmanship of the chief secretary to bring more clarity and transparency in the implementation of LBT.

These two agencies were looking into the cases of misuse of exemption notifications and undervaluation of imports involving evasion of customs duty of several hundred crores, the sources said.